Q2 2023 New York Community Bancorp Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the <unk> second quarter 2020 earnings Conference call. At this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you require immediate assistance lease spread.
<unk> zero for the operator this call is being recorded on Thursday July 27, 2023, I would now like to turn the conference over to Sal Dimartino. Please go ahead.
Thank you operator, and good morning, everyone and thank you for joining the management team of New York Community Bancorp for today's conference call.
Our discussion today are the company's second quarter 2023 results will be led by President <unk>.
Keep executive Officer, Thomas can't Jimmy who is joined by the company's Chief Financial Officer, John picked out along with Reggie Davis President of banking, Eric <unk>, President of commercial and private banking and Lee Smith President of mortgage.
Before the discussion begins I'd like to remind you that certain comments made today by the management team of New York Community May include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
Such forward looking statements, we may make are subject to the safe Harbor rules.
Please review the forward looking disclaimer and Safe Harbor language in today's press release and presentation for more information about risks and uncertainties, which may affect us.
With that out of the way I would now like to turn it over to Mr. Ken Jimmy.
Thank you Sal and good morning, everyone and thank you for joining us today.
I would like to begin by briefly summarizing the strong operating results we achieved during the second quarter.
Early this morning, we reported record net income earnings per share fueled in large part by the benefits from our two recent acquisitions of Flagstar bank in signature.
This is our first quarter with all three legacy franchises combined under one umbrella.
Not only are we Britain benefiting financially from our combination.
We are continuing to benefit from the power of diversification in both our loan portfolio and our deposit composition.
I believe that our operating performance is only just beginning to show the true underlying core earnings power of our combined organization.
From an earnings and net income perspective diluted earnings per share as adjusted for a $141 million bargain purchase gain and other merger related items.
We reported a record 47 per share on net income available to common stockholders totaled a record of $345 million.
<unk> doubled what we reported during the first quarter.
Operating results were driven by a full quarter benefit from the Cigna transaction as opposed to only 12 business days last quarter and a significantly higher net interest margin, our NIM expanded by 61 basis points to 321% on a linked quarter basis, driven by higher interest, earning assets, specifically cash and stronger yields.
On our loan portfolio and our asset sensitivity balance sheet continues to benefit from the higher interest rate environment.
Our net interest margin should remain elevated over the course of the year, given our diversified loan portfolio, which is mostly variable rate.
<unk> core deposit funded liability.
Our funding composition continues to improve as core deposits increased while Cds, both retail and brokered decline also wholesale borrowings declined 24% as we use a portion of our cash balances to pay down $5 billion of.
Federal home loan bank advances.
Over time I believe this change in our funding mix will be an advantage and support higher multiple expansion and the go forward periods.
In addition, another positive was our capital our capital ratios trended higher while tangible book value per share increased 4% compared to the prior quarter and 23% year over year, our tangible capital generation remains very strong given our earnings power.
Aside from our strong quarter results last week, we announced the expansion of our private banking businesses, which we added as part of the citizens Bank transaction by hiring 16 from the former first Republic Bank. These initial T is a highly regarded and the fact that they chose to join the new Flagstar is a testament to our business model and strong reputation in the Mark.
In place with.
With these hires we have a total of 102000 Seventeens as of June 32023, including 92 in the northeast and 35 on the West Coast and we now operate in 10 cities.
These teams are part of a broader strategy to create a premier private banking division dedicated delivering best in class service to a personalized single point of contact model. We're excited that the 16th and partner with us and look forward to achieving great things together.
Moving onto our balance sheet.
Total loans were up modestly during the second quarter, reflecting our diversification efforts as growth in the C&I portfolio offset declines in other lending verticals overall.
Total loans and leases were $83 3 billion.
About 800 million of 1% compared to the previous quarter, primarily driven by growth in the C&I book, which benefited by continued growth in our mortgage warehouse business at June 30, total commercial loans represented 44% of total loans and leases.
As our asset quality metrics remained strong.
And also best in the industry, despite an uptick in npls off of historical low levels and legacy NYSE D. Npa's totaled $246 million or 21 basis points compared to 174 million or 14 basis points last quarter. The increase resulted largely from the inclusion of acquired loans from both of our acquisitions. Despite this uptick NPA to total assets ranked in the.
Top quartile compared to industry peers, reflecting our disciplined underwriting and client selection. Furthermore, the allowance for credit losses increased $44 million or 594 $594 million compared to the previous quarter and coverage was 255% of nonperforming loans and 71 basis points of total loans importantly, this was another.
Quarter of low or no loan losses, as we recorded a net recovery of $1 million compared to zero net charge offs last quarter.
Another positive is our deposit base total deposits increased $3 $7 billion was 17% annualized on a linked quarter basis to $88 5 billion as the increase in noninterest bearing deposits more than offset the decline in other categories, including higher cost Cds and deposits related to the loan portfolio, we did not acquire from signature.
Recruiting and noninterest bearing deposits of approximately $5 9 billion custodial deposits related to <unk> transaction.
These deposits noninterest bearing deposits now represent 29% of total deposits compared to 27% last quarter.
Coming off the March events, our deposit base remains increasingly resilience. This is due in large part to the diversity of the distribution channels, which in addition to our retail branch network includes commercial and private client group's digital banking as a service and deposits derived through the mortgage ecosystem.
So part of that legacy signature declined $1 4 billion on a linked quarter basis. Excluding custodial accounts. This was primarily due to planned runoff in higher cost Cds and brokered deposits offset by $285 million quarter over quarter growth in non interest bearing demand deposits. In addition to the stabilization.
The deposit base legacy signature PCT teams have also stabilized and we expect to grow from these levels.
As for guidance given the current economic and interest rate environment. We currently expect the NIM and the remainder of $2 95 to 305.
Mortgage gain on sale between $20 to $24 million net return on MSR assets between 8% to 10%.
Loan admin income of approximately $15 million in annualized expenses, ranging between two to $2 $1 billion, excluding merger related expenses and intangible amortization as well as a 23% full year tax rate.
In terms of expenses total opex were $515 million up $120 million or 31% on a linked quarter basis second quarter operating expenses include a full quarter of signature expenses compared to only 12 days during the first quarter finally, I'd like to say a special thank you to all of our teammates which now number nearly 10000 strong.
Our results would not be possible without the dedication and commitment to our clients and our customers with that we will be happy to answer any questions. You may have to do our very best to get to all of you within the time remaining but if we don't please feel free to call US later today or this week operator, please open the line for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question. Please press star followed by the number one on your Touchtone phone.
If you wish to withdraw press the pound key.
Please wait for a moment, while we compile the Q&A roster.
Okay.
First question comes from Berlin, Preston with UBS. Please go ahead.
Good morning Brody.
I was hoping that you could talk a little bit about the.
The duration of those custodial noninterest bearing deposits.
Kind of carved them out separately and it seems like they are related to the servicing maybe of the FDA the loans you're servicing for the FDIC.
How long will those stick around and I guess in conjunction with that how long will the loan administration income from from the subs or the loan administration income from the sub servicing of those loans stick around as well at that $15 million level.
Sure. So brought it up I'll give I'll pass it over to Jon painter boats in our guidance with John when he just got.
Typically to this issue, yes, so it will start quickly because it's in the guidance with the loan admin income. So this is the cost recovery of servicing the loans that we did not take as part of the signature transaction.
So if we look back at what those words, the CRE book and it's the fund banking loans. The fund banking loans have paid off pretty significantly in the quarter. So so that's why we've seen a larger number.
And that loan servicing income number and loan admin income number for this quarter than what we're guiding in Q3.
We expect those loans to continue to pay down and it's really those paydowns that we saw throughout the second quarter that built up the custodial deposits that we had throughout the quarter. So both issues are intertwined in that the receivership loans as they are paying them. We're collecting those funds for the FDIC and then on a monthly <unk>.
<unk>, we are rebidding that back to them. So we will see a lower FDIC, our custodial deposits related a signature as the loan portfolio shrink and over time, depending on the disposition of those quarters, which we expect to be for fund we expect the sale probably to be in the early fourth quarter.
We will start to see those numbers drop as we go forward.
Got it thank you for that.
Excluding the $5 49 billion you still had some some solid.
Noninterest bearing deposit growth I think you called out 285 of that was related.
So cigna Sharon So Tom maybe you could give us an update in terms of.
How the work is progressing to kind of bring back those those signature noninterest bearing deposits that left before the acquisition.
The good news is that the teams are stable like we discussed in the opening remarks, but more importantly, we're building the team. So we think about where we're heading with the business on the private client group, we anticipate to have more <unk> going forward then signature had pre March which is really the momentum of the business model when it comes to DDA.
It was stable throughout the entire quarter and as we indicated we were up slightly which is a very positive signal based on what we anticipated when we announced the transaction. So clearly better than expected I think what's exciting about it is that the opportunity to take the business model and look at the other opportunities that we have as a combined company and look at the overall.
Corporate finance opportunity you have within the middle market groups. So that's another exciting attribute and the teams are excited to be building back the liabilities that had shredded I left the balance sheet because of the fear in March and not only are we seeing positive momentum. There. The teams are excited is stable and we believe that over time as things start to stabilize we'll get more.
This backlog, we have arity, our annualized average if you wanted to share some commentary about what we're seeing with the teams.
Thanks, Tom.
Yes.
The teams are really starting to have success and attract those clients back our clients simply just don't want to be at the Mega institutions that they ran two they can't provide the level of service that we can provide so we are seeing strong.
<unk> deposit growth because the teams really provides stellar service. We're also seeing strong off balance sheet money market fund growth.
Because our clients are.
Appreciate our service and want us to be able to control the entire client experience. So.
We're seeing clients come back.
New client growth and we're obviously seeing the ability to attract new banking teams. So it's going to be very powerful as we look forward.
That's also pre first Republic is as we focus on the opportunity that dislocate in the marketplace. We believe is create great opportunities regarding to bringing on new PSEG teams that focus on service and obviously that have the entrepreneurial view of what <unk> built over the years when it comes to deposit gathering efforts so excited about that.
Got it and John do you Havent have the purchase accounting accretion number for the quarter.
Yes, so that was another item that came in better than expected and one of the reasons why our margin was as strong as it was.
If you look at it from both institutions Flagstar really came in where.
Where we anticipated it in that $25 million range.
It was the signature purchased accounting that came in.
Came in faster, we had more significant paydowns.
And the loan portfolio than we anticipated.
The portfolio dropped by a little under $1 billion due to a couple of different movements between our loan categories.
Our negotiations about which loan that we took that we talked about on the last call. So when you look at the actual accretion that was $75 million for signature in the quarter and about $20 million of that was related to unanticipated pay downs.
Got it Okay, and then just one.
Yeah go ahead yeah.
Sorry, Brian just going forward I would expect that to be more in that $50 $55 million range.
But it is of course, as you know dependent on which loans pay down and what kind of marks we had against those loans.
Got it and then the last one for me Tom I think you addressed the uptick in Npls.
I thought I heard you say there is.
From the inclusion of acquired loans or something I was just hoping you could address the CRE.
The increase in the CRE Mpls and if any of that was tied to office just because I noticed that you said that you did have a decent amount of office re appraisals done at this point as well.
So specifically to Mbas, we had an uptick on signature loans that we acquired so you would assume that's in the purchase that's probably embedded in purchase accounting. So we're comfortable that we'll cover that when it comes to any potential loss, there, but thats $31 million of signature exposure that we acquired as part of the transaction. The other piece, mostly is from loans acquired through flagstar.
That's about 30% from $22 million in total from some from the loans acquired from <unk> as the overall it was flat when you take out the acquisitions.
Got it okay. Thank you very much everyone I shared it.
Okay.
Thank you. Our next question comes from Steve Moss with Raymond James. Please go ahead.
Good morning, Steve Good morning.
Sorry, if I missed it here, but I wanted to ask about the first Republic team.
It seems you hired just curious as to what kind of book of business or how big a book of businesses and any color you can give there Tom.
These let me start up by saying, we're super excited to have them and basically decided to build it to build a <unk> model and continuing to invest in that model. So we are making investments clearly signatures growth organically was.
Is the model right. So it's very similar entrepreneurial in how they look at that business as a high pipeline.
The high touch service.
Guessing on boots on the ground and making their clients very comfortable on our banking perspective.
So the focus here is that there is a dislocation in the marketplace.
Very competitive.
Pass it onto Erik but before that I just wanted to tell you that we're super excited to have them stay tuned as if there is a lot of activity out there and and.
We continue to be successful on convincing these team members too to become part of the new flags. So Eric do you want to give some more color there, yes, I mean, each one of these teams comes with a book of billions of.
$1 of deposits and loans as well as <unk>.
Wealth assets.
AUM so very excited to have all been there three in New York.
Three in California, thus far as Tom alluded to.
And.
We just feel that we're the best without question the best cultural fit for these bankers right. We have an entrepreneurial model like they had a truly caters to the clients' needs.
That single point of touch contact so.
This is a great home for them.
Great cultural fit.
We have the products and services that we need to go to market, which is critical.
We're really looking forward to their future success here, but billions in deposits and loans per team.
Okay I appreciate that color and Eric you mentioned, but deposit momentum remains strong it sounds like it's into July is there any color you could give around.
The trends you've seen after June 30th.
To kind of get a feel for what's coming on.
I'll start by saying we are seeing overall for the bank to in total is very stable I will tell you that we still have to deal with some of the assets are going to be sold in the market that are attached to the core franchise of signature in particular advantages that we anticipate to see that run off eventually.
It was done sooner.
Soon as deposits will follow the outside of the anticipated.
Businesses that were not acquired through the transaction, we see strong stability and in addition to signature transaction. The community Bank franchise has been very stable maybe read you can share some commentary on what we're seeing on the community bank, but we're a diversified company. So maybe Roger you can add some color to what we're seeing on the retail side.
Sure Tom So, yes, Tom said through the balance of the year.
Lost about 3% deposits through the liquidity challenge that the banking industry space, but we're starting to see those those deposits.
Come back they definitely stabilized and we're actually starting to see.
Some modest opportunity for growth.
Projecting actually does deposit stay relatively flat through the balance of the year and that our weighted average cost is de minimis in terms of the inquiries. So we feel really good about the stability of the portfolio I think it reflects the relationship that our bankers have with our clients.
And then on the commercial side equally we're seeing some opportunity to actually gathered some deposits because we look at the opportunities for.
Strategically bring on clients, who are may be disenfranchised from other lending organizations that cannot land in the current environment and so we're actually picking up some relationships on that side as well so very positive momentum on the deposit side.
That's great color. Thanks, Eric just add addition.
Culturally the focus here is his relationship deposit gathering and all of our lines of businesses. That's the culture here going forward I've said it many quarters deposits deposits deposits culture culture culture and on the culture, Bill really meshing, well with putting three companies together to build a new flagstar and clearly I think on the lending side.
Our lending teams truly understand that we are leading with the deposit opportunity, we really want to make sure that we fund the balance sheet commercial bank like in our transition from from dependency on wholesale finance will dissipate over time, but we've made significant strides in that way over the past few years. Notable if you look at the percentage of wholesale to total total deposits. So we're excited about that.
But that is the culture that we're building here.
Great I appreciate all the color there and one last one for me just on expenses here.
As you look to integrate all three banks kind of curious.
Where do you think if you have any update as to where the expense run rate could shake out.
Post the integrations and at some point in 2014.
And we gave public guidance of about 2 billion to $2 1 billion is that right. John there was a public guidance. We gave that's fully loaded with anticipation of being a $100 billion plus bank. The first Republic teams that we anticipate bringing on so we think we have some reasonable conservatism around that given the nature of the growth story. This is going to be a very powerful opportunity for us to capitalize.
In the marketplace with dislocation and we feel that as we go into 'twenty four you'll start seeing a lot of integration benefits of putting the systems together so the <unk>.
Significant adjustments that we'll see next year will be through consolidation of systems and were looking forward to that John if you want to add some more yes. So when you look at that $2 billion to $2 1 billion.
That's why our 'twenty three guidance as Tom mentioned with the conversions that we have coming in 'twenty four we're comfortable that our noninterest expense base is not going to grow dramatically off of that guide from from 23 to 24. So that's that's where we're comfortable it's very consistent with what we said in our last call, where we mentioned where we might see.
Some of the upcoming quarters be a little bit higher, but we think it will stabilize over time and we think it will stabilize in this range and that has the anticipated cost structure of the new teams, maybe Eric can talk a little bit about economic having viewed the business and how we can build that to neutrality and ultimately to a total return basis.
Ultimately receive the deposits and loan growth that will be coming in.
Getting us to a breakeven in about a year and a total earn back in 18 months on that which is pretty normal for team growth right. When you acquire these teams that come with nothing right Theres no loans no deposits, it's about like acquiring a bank. So it does take a little bit longer for them to ramp up and get to a breakeven point.
Because you just don't have those revenue streams out of the gate.
But what happens over a multiple of years is that they continue to grow right and they don't stop growing because of the way that we align their interest with those of the overall bank. So.
Yes, when you look down the road after three years of well into 20 plus percent.
ROE and that will continue to ratchet up over time as we pay down expenses.
That's the goal.
Great. Thank you very much.
Sure.
Thank you. Your next question comes from my line of Gasol him with Morgan Stanley . Please go ahead.
Good morning, Hey, good morning.
Question on just on the NIM benefit from does.
$5 9 billion of custodial deposits from saying that you had this quarter.
Should we just think of that as those $6 billion of deposits at the 5% rate you get to what the fed is that the benefits yet.
This quarter from that.
Yes that is that's.
The benefit we did keep that money at the fed the number that was the number at June 30, the average number was a little higher.
When you when you look back at especially April and May.
But yes, it's at about 5% I would say the average is probably closer to $8 billion.
Got it so as these.
Deposits come down and I think youre, saying.
They should only royalties start coming down and in the fourth quarter right. So over the next.
A quarter or so and you still get some benefit.
The large the large piece and Thats why you see the guide on the margin being lower than the $3 21 actual in Q3 right. So the large amount of the pay of the custodial deposits. We believe happened in the second quarter, we think that the.
Austin the portfolios have slowed a little bit so we're collecting a lot less right now plus the the announcement that the fund banking business is expected to hit market and potentially be sold in October we're going to see a drop in the third quarter.
Just because of the way the cash flows from that portfolio occurred in Q2 compared to how we're expecting them to occur in Q3. So we're going to see that $6 billion go out very very quickly in July it's in our margin guide correctly, yes.
Got it alright perfect.
And then separately just on regulation.
We're expecting.
The Basel III end game rules.
Yeah.
Now that you're over $100 billion in assets can you talk about how youre planning for any increase in capital requirements and how you think about the right level of capital that you'd like to maintain.
So I'll start off and I'll defer to John but obviously this is until the rules come out we'll have better clarity. So we will have it when you have and hopefully very soon sometime today at the end of the day. We spent a lot of time thinking through it and obviously, we believe there'll be some type of implementation period, but this company is building capital. This company for the first time in a long time is generating tangible book value.
<unk> by the earnings power of the company. So we feel very confident that we have adequate capital and when the rules come out we'll be able to assess how that impacts our position at a $100 billion just bear in mind over the past decade actually going back to 2012, we've been preparing to be a CCAR bank and since we've.
Right before the flagstar transacting with preparing to be $100 billion bank rate under the new rules. So clearly this is going to have some impact and when we see the activity the actual literature on it we'll assess it and run the analysis to see how will impact us, but clearly we're prepared for it and John if you want.
Are there as well for some of the items that were expecting is going to be in the proposed rules, including the lack of an.
Opt out.
We actually screen really well when you look at as comparative to our peers in the $100 billion plus range.
If you look at CET one when you include the loss on Securities and we jumped to the top quartile of capital ratios against against a lot of our peers. So.
There's a lot of it no doubt a lot of work to do once the proposed rule is really come out and we'll analyze it and as Tom mentioned.
We'll deal with the implement implementation period and.
And go forward from there no doubt there'll be higher needs for capital, but we are generating it on an organic basis right now, which is really nice to say that's right.
Alright, and your forward expense guide it would also include.
Any any investments that you need to make on the regulatory side too to become a larger bank that's going to be a larger bank right.
That's correct, yes, great.
Thank you.
Sure.
Okay.
Thank you. Our next question comes from that.
Bernard bonding Vijay <unk> with Deutsche Bank.
Good morning.
Hey, guys good morning.
Just on loan growth. So it was modest but you noted it reflected some of that presentation efforts.
And a disciplined client selection underwriting you did have some growth in mortgage warehouse. So I was just wondering where are you seeing across your verticals.
Regretful demands and what is your outlook for loan growth in the back half of the year.
So it's interesting we've had obviously a disrupted market since the fed was very proactive in raising interest rates at least on the multifamily side. So if you think about what's going on with that portfolio, it's relatively flat.
And our coupons are rising significantly as customers are opting to go into a sulfur option as they get ready for what they anticipate hopefully lower rates in perspective in 2425, So we've had about $3 four.
$4 billion that we didn't have a year ago, a year and a half ago that opted to take the sulfur option, which puts us in a very good position right now thats slightly south of 8% coming off a 3% coupons and they're paying their bills, which is phenomenal and he's a wealthy customers in making business decisions not to lock in a fixed rate structure and the other any other side of that we will sell off.
Up to to put into the synthetic lease and structure that allows them to lock ins.
Our global quality, a swap transaction tied to a fixed rate option that they could live with.
With given if they feel that this is the right fixed rate time to lock in the next five to 10 years. That's an Allstate has also been a new strategy for the bank, but on the multifamily side. It Hasnt in theory is not a lot of activity. So.
We think that'll turn in 'twenty four 'twenty five as rates May go lower for them and we will have a lot of opportunity at the same time, we're gearing up for the signature portfolio. That's interrelated as customers. So we're going to look at those opportunities and and bank. The relationship that we have we have a lot of cross relationships. So we think there won't be some good growth there as we go into 'twenty.
25, so I think that business, which is the largest component of our balance sheet. When it comes to asset classes is.
Is operating as expected given the environment in respect to the other lines of businesses. It's been a it's been a reasonable growth story, we're allocating capital based on hurdle rate of return it's more of a philosophical view as we look at the businesses and more importantly, we're hurdling at expected returns because credit trends are much tighter right now so we're able to offer a much higher.
Right given the marketplace. So it is a it's a tighter credit market in all of our businesses. So we're seeing strong opportunity in builder Finance you mentioned warehouse warehouse is doing extremely well be cost of dislocation. Many banks that were in the warehouse business can't be in the warehouse business given what happened in March and we're seeing the overflow into our book and we welcome that opportunity MSR financing.
So maybe Lee if you want to talk a little bit about <unk>.
Amazon warehouse as well as on the mortgage side, we're seeing some positive trends there, but I would say in theory right now as expected based on our growth trajectory.
As according to plan I think I said it last quarter, we don't have to make alone. This year and we will do very well. The good news is that our businesses are thriving and we're looking forward to allocate capital to this opportunity at much higher spreads. So Lee if you want to talk a little bit about warehouse MSR and you might want to talk about the mortgage business as well.
Yes sure. Thanks, Tom So let me start with warehouse and Youll see from the numbers average balances were up 600 million quarter over quarter now part of that was due to mortgage volumes being up about 35% quarter over quarter. When you look at what was happening in the industry and we've got the natural lift from that but as Tom mentioned.
There has been dislocation in the warehouse.
And we've seen a number of players announced that they're exiting and we can take advantage of that we've already seen.
Towards the end of the quarter some of the clients.
A party to those banks that are exiting reach out to us and as you know we're already the second largest warehouse land.
In the business and so as we move into the second half of this year. We think we can take more market share as a result of the dislocation of some of these other players exiting now as Tom says.
When we make loans, whether it's warehouse arena. So we're always looking at the return on equity and the great thing about warehouses. It turns very quickly.
We're generating very strong returns and we feel confident that we can continue to show market share growth as we move through the second half of the year just given the dislocation with C. That's also spreading into the mortgage servicing lending arena as well and we've seen players pull back.
As we're looking to sort of preserve capital we've got a very strong capital position and so we've seen good growth from an MSR servicing advance lending point of view and we think we'll continue to see that as we move through the second half of this year as well and then just coming back to mortgage originations generally and it's called <unk>.
<unk> there has been dislocation in that space, we've seen a major players exiting the market. We've seen mine apply is exiting the market.
And our fallout adjusted locks quarter over quarter increased 70%, that's what we calculate game on Siloed.
The vast majority of that increase were in the CPO channels, particularly particularly the correspondent channels.
Some of the dislocation that I, just mentioned and we feel that we will continue to take advantage of that as we move through the second half of the year as well. So a lot of this dislocation is really playing into our hands.
We feel good about our positioning we've been in the mortgage business 35 years, we've been in the warehouse basically 30 years.
And we're performing very well right now.
Yes. So in addition to that I think the reality is that we are in these businesses and they're thriving and but more importantly, the focus towards complete banking relationship. We're seeing good deposit flows we want to do that everyone had higher compensating balances, but that's the mandate and given that this dislocation is moving assets of other balance sheets, we are seeing higher deposit compensating ban.
And these lines of business, which is very encouraging for our culture going forward as being a relationship deposit driven institution.
No I appreciate that's a great color if I had one follow up I think there's questions for Eric.
So legacy signature had a specialized banking team that focused on EB five deposits.
I'm just curious was that team acquired.
I'm wondering if you could comment on any.
Pipeline growth that could be there. Thank you.
Yeah, we actually exited that team.
While maintaining the book and moving it to another team.
That did have experience in that field and.
And we do anticipate that we will see growth in that area.
Five now is a bit more stable, though that the government has approved the <unk> five program for five years, we used to do it on an annual basis.
Often they didn't approve it timely given congressional matters. So.
And we expect to see to see some pretty significant growth in that space.
The deposits build.
And is it similar to prior projections or is there anything you could.
Provide on that.
I think it's a little too early to say right, we really need to see how.
Clients anticipate utilizing the <unk> funds in their various projects specs.
Sure.
I would think that we will see billions overtime and deposits, but I think it's going to take a little bit longer a bit more of a lead time than we saw in the past.
Okay, great. Thanks for taking my questions.
Yes.
Thank you. Your next question comes from Dave Rochester, with Compass point.
Please go ahead good morning, guys.
Hey, good morning, guys great quarter.
Thank you just going back to that.
Conversely on the teams. It seems like you guys have a great opportunity going forward here to capture even more of the first Republic teams as well as successful teams from other banks given the incentive structures you guys now have in place was wondering how the new team pipeline looks at this point after capturing those teams was curious if that got people's attention.
I would think that it would have it might even bringing even more interest and then just going back to what Eric mentioned on what these teams are bringing over it was great hearing about the billions of deposits and loans, but you also mentioned AUM, which was a very exciting part of the first Republic business do you guys need to develop or build out of your functionality to support those wealth app.
Or just the wealth business in general and then is that going to be a big focus here in terms of bringing on more teams with wealth management assets and growing that business going forward.
I'm going to be very short and sweet and this one out of deferred Hereford just stay tuned.
Things are fluid, but Eric why don't you handle that question sure.
Thanks, Tom and good.
Talk to you Dave.
Yes.
Opportunity is real right when you look at the banking landscape.
The megabanks is or who we specifically built the institutions to compete against them.
There are more arrogant than ever which is great.
Or is it the regional banks quite frankly don't have ammunition to go to market with right. So we not only have a balance sheet to utilize but we have an approach and a team based compensation model and practices that are attractive to these to these bankers out there. So I think it I think it is sending a buzz around the industry.
We are actively engaged with a number of other teams to look to bring on board and we will certainly be adding to our wealth capabilities. We did add some people already that we'll be announcing.
But we broadly have.
The capabilities on the wealth side to meet the needs of these of the teams and the clients that they are on boarding.
We always are looking to improve but I would say David that we have the vast majority of the needs.
You know that we can meet their needs of their clients right now so we feel good about the capabilities that we have.
Analysis subtracting the wealth management.
Side of the business to work with those banking teams.
Alright, it sounds good.
Just a smaller one on the margin.
Borrowings rolling off it sounded like you have got another roughly $5 billion or so in the back half of this year.
Curious what that opportunity looks like for next year.
As you try to offload the rest of this wholesale funding.
Yes, So next year $2 9 billion at $2 27 is what we have come in so that that portfolio is.
That is really really gotten.
So compared to where we've been in the past, especially for the size Bank. We are right now, but yeah $4 9 billion. This year, assuming some of the portables get put which we are assuming that they will given their their current cost in next year or $2 9 billion attitude 27, So Dave just to be specific when we announced the signature transactional.
<unk> was to pay down the wholesale and be more obviously deposit focus this is in our strategy so as John .
<unk> indicated that a lot of the higher cost stuff has paid off already and we've.
Replace it with demand money in liquidity from the transaction, but I think holistically going forward, we want to be obviously, having a much more focused loan to deposit ratio indicative of a commercial bank model, but obviously as we've said time and time again the culture here is relationship banking till after the deposits leave it the deposit opportunities and we think we have a lot of low <unk>.
Fruit as he put this organization together one of the areas that we haven't talked a whole lot about it but we have a very diversified team of people that can really service. The cigna transaction when it comes to opportunity on the corporate banking side and I think that's going to be something in the years to come that's going to be very favorable as you look at leading deals for these middle market.
He is a very strong companies and we have tremendous deposit relationships, but they don't have a lot of we'll call loan activity specifically for some of these larger corporate clients as we're not leading the corporate side of the balance sheet. So we can be active there as well syndicated deal structuring deals and being a corporate finance banker so lot of opportunity to put these companies together the excitement levels high.
And looking forward to the future.
Alright, all sounds great guys I appreciate it.
Thank you Dave.
Okay.
Your next question comes from Matt Breese. Please go ahead.
Good morning, everybody.
And just to be clear either Tom or John .
The custodial deposits when do you expect them to kind of.
Draw down to near zero balances that by the end of the year or early next year.
We're going to see a big drop in the third quarter because of just the nature of the Paydowns that we saw early on in the portfolio.
That $6 billion.
They will still be a number over the next couple of quarters, but it is going to drop dramatically my guess would be in the $1 billion to $2 billion range in the third quarter, and then dropped even further from there.
It ends up going to zero, if and when the FDIC sell the loans and if we don't retain servicing from whoever the new buyer is of that portfolio. So it is just the collection of P&I and any pay downs.
And then the remittance back to the owner.
Great I appreciate that and then I wanted to follow up on expenses. So for the full year 2023, with a two point over to $2 $1 billion guide.
Can you just level set and provide me, where we are relative to that number year to date I see it at 909 million, but I wanted to confirm it because it implies a <unk>.
<unk> expenses for the back half of this year, and then a pretty significant ramp down in.
In 2024 should be thinking about flattish expenses.
Yes. So you are right when you look at the six months right.
We're just under $1 billion right now given where we are we if you looked at the second quarter run rate is just under $2 $1 billion run rate. We will have some expenses as Tom had mentioned Thats in this guide which is included in the.
There are new rules that we'll see.
Later today, most likely and that's.
Or just the normal $100 to make sure. We're above 100 billion. So we're going to see some increased expenses in 'twenty three for that.
And then we believe once we can get the systems conversions done that that'll be what allows us to stay pretty close to flat in 2024, when you compare it to 2023, so as I mentioned early on we're going to see a ramp up in expenses.
In the in the next couple of quarters I mentioned that on the last call.
There's a lot of work going on.
There is a lot of work being done for the FDIC loans as well.
Remember that that benefit right now is showing up in noninterest income.
That will drop overtime.
And as that drops over time, we'll be able to get some efficiencies on the noninterest expense side. If we're not ended up servicing those loans when we get into 2024, depending on what happens with those assets.
One other point and this is Tom is that we're also investing into the PCB model. So we have some teams coming onboard projected into this run rate and that also commensurate with some good revenue opportunities as we as we go through the breakeven as Eric indicated we are anticipating on winning a breakeven on bringing the teams on and from there. We have hurdle rate of returns that we're targeting to 20 plus percent of it.
Very short period of time. So that's also in our run rate so clearly.
The fresh a public transaction didn't happen the guy who will be very different but we're clearly investing in the model, which will have significant deposit opportunity revenue opportunity across the board and profitability to the bottom line over time. So that is also embedded in our forecast.
Understood. Okay, maybe if we were to think about the back half of 'twenty four should we think about at that point getting to a two to $2 $1 billion or right around the same kind of guide range and.
<unk> run rate and expect kind of a.
A bell curve shape, Ryan and decrease in expenses till then is that the way to think about it.
I mean, I don't know about bell shaped, but yes, I would assume that when we get to the Q3 Q4 'twenty four numbers, we would we would see all things being equal.
That those those expenses would be lower than Q1, and Q2 right. We're expecting the flagstar conversion will be in February of 2024. So the back half of the year will be more of a run rate kind of perspective, when we get through that.
I think thats right.
I don't think it.
Dramatic.
But I do think that you will see a lower run rate expenses in Q3, and Q4 as compared to Q1 of 'twenty four.
Got it okay. Thank you for that color last one.
Can you just describe the interest rate position of the bank at this point.
And how the NIM.
Would respond and call it a down 100 basis point scenario and whether or not you want to describe that in parallel shift or just a front end coming down I would just appreciate some color on asset sensitivity liability sensitivity and.
And maybe.
Adjusted for liquidity.
Yeah, no absolutely so.
As if you look back to the first quarter, we were moderately to.
Very highly asset sensitive given the amount of cash that was on the balance sheet. We are now slightly asset sensitive and that asset sensitivity just with the passage of time and the utilization of some of the cash on hand.
And some of the loan growth that we may see in the back half of the year. We believe we will get to very close to neutral.
So we're not an outlier anymore as we had been historically on the liability side, we think right now we're slightly asset sensitive with a trend to get a little less asset sensitive.
Just one other point to think about it the customers on the multifamily side.
Naturally if rates were to go lower in 2000 and for our customers and look to take their floating rate instruments, probably lock in some some fixed rate structure, and then you're going to see a lot of activity from the portfolio we had.
Virtually no prepayment activity for the past year, it's been a slow market. So we anticipate a lot of activity, which will naturally organically put this company in a very interesting position when it comes to managing interest rate risk with the clientele will be active in there if there's a rate change next year. So we're anticipating some activity there, which can naturally hedge the balance sheet towards neutrality.
We want to be agnostic and movement in interest rates. That's the plan that we don't want to be liability sensitive too much our asset sensitive do you want to be relatively neutral as we make money in any interest rate environment. Obviously the goal here was to get to 3% of the BBB got here, probably a couple of quarters earlier, that's a positive attribute in the current environment because of the stability of the signature transaction, but I won't.
Book is all reacting very favorably when it comes to spreads and more importantly, it's a tight credit market right. So as I indicated the loan spread offering right now is higher and we are getting it and thats with industry wide. So there is some quite tight credit standards and customers have to finance or we're going to be in the market. We're in business and we're comfortable on working with our clients, but the beauty.
This opportunity is that it has had much higher spread.
I appreciate all the color that's all I had thank you.
Thanks Pat.
Okay.
Thank you. Your next question comes from Peter Winter with D. A Davidson.
Good morning, Peter.
Okay great.
I was just wondering could you give an update on the office portfolio and then secondly, just are you seeing any type of stress.
On the multifamily portfolio just between.
The inflation pressures higher interest rates and it's just harder to increase rents on a rent stabilized apartments.
Yes, so I'll start and then I'll defer to John the CFO , but clearly it's been resilient on the multifamily side, it's been an environment, where we have a lot of wealthy customers.
Going through this journey of no activity that there's a 3% coupon from the lowest going into let's say close to 7% eight so there is a.
A substantial change and they are weathering the storm, they're paying their bills like I indicated RBC.
Probably 65% of loans coming up for decision on the actual maturity <unk> repricing that choosing a sulfur option.
Holding that until they feel it's the right time to lock in a fixed rate structure, which is unusual because we haven't seen this environment in quite some time, but they're doing well in that environment. There's no question that the bank is benefiting from that and they are getting some cash flow.
Adjustments to their income stream, but these are wealthy customers that have large portfolios and they're weathering the storm and waiting for low interest rates and we have to.
Tremendous asset quality performance as a result of this environment, which is a positive discussion point, we can talk all day about the fact that its cash flow to being a squeeze of course, the interest rates going from three to eight 9% is going to have an impact, but we think that we're getting close to a point, where if we stabilize on a sofa side and there was this view.
That next year will be the year, where the fed funds to adjust their policy stance and customers may be very active on thinking about the next five to 10 years of financing, but we're not seeing any late pays but not seeing any delinquencies on multifamily the commercial real estate portfolio is doing extremely well its resilience we have statistics in the deck, we talk about that.
Not that we're not going to be perfect. Because obviously, it's a it's an environment, where it's fluid, but it seems like as we reappraise buildings as we get deeper into the portfolio and we and we deal with some one off issues. It's been a very resilient portfolio. So with that I'm going to have John go through this district, but I will tell you that we're very pleased with the asset quality given the ramp up of interest rates and John if you want to share some of the.
Typically on the commercial side, yes, and especially to your to your question Peter on office right. We do have a slide we added some additional information as we're going to continue to do over time.
The portfolio of $3 4 billion really pretty consistent from the prior quarter with average <unk> and Ltvs in average balance and we did have just under 40% of our office exposure has been appraised reappraised in 'twenty, two and 'twenty three.
So there is 15% of it is rated special mention or substandard. So.
Portfolio has been strong.
We have seen some early delinquencies, we think the bulk of them will be cleared in the third quarter.
But we are working through a couple of items as you can imagine, but still it's been very strong.
It's bread and butter type lending for us its the same structure that we did and that we've done historically for decades with multifamily just with a different collateral base. So.
Very very cautiously optimistic about the portfolio, we have been actually since COVID-19 hit and if you could see there's really not much coming due in 'twenty interest of 23% and 24. So the bulk of the portfolio hate this option or contractual date, starting really in 'twenty five and forward.
Got it thanks very helpful and then.
Can I just ask a follow up on the mortgage warehouse you had nice growth in mortgage warehouse are you able to get deposits with the mortgage warehouse business.
And the reason I ask is typically fourth quarter it tends to be seasonally weak and so do those deposits flow out.
So I'm going to leave it.
Yes, yes, yes, so I think I think the answer is yes, we can bring in deposits with the warehouse lending business as we can with all lending businesses and it's a focus of.
The bank.
Tom has been very clear that it's deposits deposits deposit. So the answer is yes, we can bring in deposits.
From the warehouse customers I think the other thing that I would point out is we can bring in more deposits from the mortgage ecosystem as part of the signature acquisition.
Acquired cash and Treasury management team focused on the mortgage ecosystem and you think of all the <unk>.
3500, <unk>, we have 400 warehouse customers you think of the.
MSR owners that we sub service for whom we lend to.
So we think there is a big opportunity to bring in more deposits from that mortgage ecosystem.
Paul.
Thanks.
Thank you.
Thank you. Our next question comes from Christopher <unk>. Please go ahead.
Good morning, Craig Good morning.
Hey, good morning.
John just a follow up to a prior comment about the asset.
Our rate positioning of the balance sheet.
Zoom out and just think more holistically about Doug.
The company make more money.
Downright environment could you speak to potentially the opportunity for better loan growth a better mortgage.
The forward curve is right in 2024.
Yes, I mean, there are a lot of even being slightly asset sensitive depending on how the curve moves the other item to really think about we talk about asset sensitivity from an NII perspective, but if we see significant declines in rates.
Banking business the warehouse business is going to.
Really really explode from a from an upside perspective and protect that the income that we lose in some of the other areas. So.
We also have been what Tom mentioned on the multifamily portfolio as well I mean, youll see prepayment fees start to pick up substantially I mean, we haven't talked about a prepayment fee in quarters now right. So.
And when we were a much smaller institution, we had a year, where we made $120 million in prepayment fees.
Depending on what happens with the with the rate curve. There are multiple levers in this balance sheet that can help in any really in any rate environment.
So we're going to continue to strive for that.
Try to get the balance sheet as agnostic as possible to interest rates.
You can't plan of course for everything, but that's the goal and we don't forget about that mortgage business, which will absolutely pick up.
If we do see across the board rate declines.
Okay, Thanks for that and John while I have you.
Just on the just on the Accretable yield if I could for a second could you help us with what's in your guide for.
For the back half of the year I think you said 25 came in from <unk> 75 in signature, but 'twenty was high.
What's the right level and what's left to kind of burn through over the next several quarters.
So the easiest way to look at if you combine the two the actual for the second quarter was about $100 million.
In the guide is about <unk> 70 on a combined basis and you just given the way purchase accounting works that will slowly decline over time.
With the exception of Paydowns right Paydowns, depending on what kind of loans pay down you could see some some spikes in that number but that's what we're in our guide we think it's conservative.
And like I said, it is dependent on the market and what happens with interest rates and what happens with Paydowns, but.
That that $50 million or so from signature that we're now expecting is higher than we originally anticipated and it's just the nature of the portfolio and the speed that portfolio seems to be paying down debt.
That's helpful. And then what's the total pool that will come back to you over the next couple of years, what's the remaining balance of that accretion.
While on the loan side originally.
The signature piece was over $700 million. So we still have to have almost almost $1 billion in total in loan marks when you look at both banks, but I'll make sure I get that number I'll make sure we get that out there.
Alright, thanks, guys.
Thank you.
Okay.
Your next question comes from Steven Alexopoulos with JP Morgan.
Hey, good morning, everyone. Good morning.
Good morning, so on the balance sheet. So you've obviously had a huge transformation over the past year and you've been very clear John about the custodial deposits coming out some higher cost borrowings coming out in the second half two but beyond that are there any big structural changes on the horizon, we should be thinking about or are we finally getting to more or less.
Steady state, where its loans and deposits that are just going to drive net interest income.
Yes, I think Thats right I mean, you can see in the deposits that we have the wholesale borrowings that we have maturing in the next couple of quarters and even next year theyre not at high rates. So it's much more of.
Business as usual and let's use these deposit funds that we bring in to fund loan growth.
And over time could we look at paying down wholesale borrowings of course, we always good but there is other options and some high cost funding you can always look to reposition.
Be a great problem to have if the demand deposits continue to grow but I think youre right in the fact that.
Pay down at a high cost borrowings that we did in the second quarter Thats behind US, Yes, I would just add Steven the one point at this time that the reality when we look at building out the teams and focusing on the PCB model, 40%, 50% type of statistics has been that the track record for deposit inflow of demand money. So every dollar bringing in.
Forecasting 40, but the reality is more like 50% that's going to be a significant catalyst as we change the mix of our deposit funding going forward at the same time, we are focusing on compensating balances amongst all the lines of businesses and we're going after the operating accounts payroll accounts, you really feel confident that if we're going to put our capital at risk we want to make sure we have the relationships. So that's good.
B a relationship driven model and that's where we're heading for all of our lines of businesses and that's how we're hurdling a returns on a loan by loan basis. That's it that's a sea change on culture here and I think it's refreshing to have that capability now having diversified portfolios, we can allocate capital to.
Focusing on deposit gathering.
Yes.
And then on the NIM I think we all understand why the NIM is coming down in the third quarter.
Typically you don't go beyond that but do you feel the bias is still to the upside right. There is some unusual.
Dave activity, because these custodial deposits, but once we get beyond that do you feel like at least over the near term.
You should see some expansion.
So what I said a quarter ago that we think we get to that 3% type Mark that net NIM by year end, we think we got a couple of quarters earlier and when you take that model and you look at the expense base and the size of the balance sheet and put a reasonable return on an average balance that going forward.
You have a an environment that we've done really well and when it comes to growing the the NIM from.
Honestly in the high twos right. So if we get to the mid to low threes as more of a holistic view of the business model based on the funding mix that we bring to the table to grow the business. It's a different it's a different run rate right. So I think thats something that accelerated here and given the lines of businesses and we talked about the fact that our loan growth has highest.
Spreads, we think that 3% plus type margin is reasonable and thats the target, but we got there a little bit sooner. So we're excited about that it really has a lot to do with the market as well that there is definitely a credit tightening in the system and.
That was talking about that publicly there's no question that <unk>.
These expensive and we're getting paid for the risk and more important that will impact stronger margins for this company.
Okay. Thanks, and then a final one.
Eric It's great to hear you on this call.
<unk>.
The experience has been like for you and the team go through the FDIC now you're in New York community does it feel culturally like the weight signature Phil.
You guys fully back on offense is what's going on.
We're back at it Steve There is no doubt I mean.
Think about where we were four five months ago to where we are today.
My second taxed.
<unk> was to Tom.
Got it.
John .
They immediately and when I say immediately immediately got back to me right.
Embraced us since the moment we've arrived.
Completely appreciate our culture and what we're doing here and we're doing a lot around cultural transformation overall across the organization I can't tell you how pleased I am to be here.
They are truly just embraced all of us. So it's about it is the best cultural fit and no question in my mind.
And we're really excited about the future.
Steve I said it earlier the opportunity right now is tremendous for us.
And that's recognized by the executive team here by the entire board here.
And by the management group right, we're going to we've got an opportunity to seize on the moment.
One that we haven't seen quite frankly in probably a decade and I quite what's going on back to the days of when we acquired teams from EAP. When they were purchased from North Fork right. When they were acquired I mean, this is a tremendous opportunity now there will be further M&A.
Even given the regulatory hurdles. Many of these mid market mid sized banks need to go away and will and we will be able to capture on that.
Really excited to be here.
Very very much looking forward to the future.
Sounds good great to hear from you again.
Best of luck.
Thank you.
Thank you our last question, we have JC air with Jefferies. Please go ahead.
Good morning. Thanks, Good morning, guys. How are you doing.
So real quick just.
On the cash position still on still strong at 16 billion it sounds like the borrowing pay down.
The low hanging fruit has been picked but.
Just curious what opportunities do you have to optimize the margin with that excess cash.
And then more longer term, where where does that what is your minimum cash position.
Versus that 13% of assets today.
Yeah. So so we look at cash and unencumbered securities together from an on balance sheet liquidity perspective, right now, we're very comfortable with where we are.
The utilization of the cash.
The benefits that we can get that can drive it forward. We do have the wholesale borrowing trade as I mentioned with the high cost wholesale borrowings that we took care of in Q2, we do have some high cost brokered Cds.
But we can always deal with.
In order to try to maximize and benefit the margin, but I think the real benefit.
Longer term focus is what can we do on the deposit side and if we can continue to bring in noninterest bearing demand deposits, that's going to be the driver of margin growth in the future. How successful we are at that will drive that will drive the margin story I would just also add this on a perspective, our balance sheet. If you think about banks over $50 billion, probably the lowest percentage of securities to ask.
It's in the country right now by design, we have no health to maturity portfolio don't believe in it we're very comfortable with it putting it in NSS, but we have limited exposure there, but we have a very small book that needs to be right sized over time as we go into the $100 billion standard. So that's another area that probably will generate some additional revenues for the company as we rightsize ourselves to the industry.
Got you, Okay, and just last one for me I apologize if I missed this but the signature teams.
The 127.
You guys acquired or whatnot, what is that number today.
That's what they want.
I think number one order that at 130, we had a handful that ran off.
Again, the deposits are stable, but what's interesting about the story here is that since our last public release, we had stability there hasnt been any exits at all and it's been an encouraging experience as Eric said the team is motivated we're focused on building back the business.
Getting the clients back into into the into the higher average balances, but the accounts are still hear a lot of the money has moved to different funding vehicles to try to get out of the system because of the insurance issue but.
Let's talk about some of the strategy that we had on an off balance sheet. That's also accommodating some of the customers right now coming back to us that's really the new go to market right.
The clients like Tom said, the clients didn't close their accounts. They just move their funds out alright, and theyre finding it very difficult very difficult to do business at the Mega institutions that they move to so we're seeing the operating accounts come back and Thats why we had DDA up this quarter, alright, and thats, so thats starting to flow back.
They just they can't run their businesses at these other institutions.
And then on the excess funds that we've normally keeping on balance sheet money market funds for them, they're bringing those back some on balance sheet and some off balance sheet into.
An array of off balance sheet money market funds that we have available for those clients right. So we're going to start making some serious fee income.
That.
Which doesn't tie up capital and really juices our returns.
That's the new go to market clients are reacting very favorably to that theyre recognizing that we can continue to control the entire client experience for them, while also giving them that safety.
So we're seeing successes there across the board quite frankly every time I talk to the team I hear about how unhappy with our clients are elsewhere and how they're starting to come back and I think that as I said previously our anticipation is that we will have more teams going into that in short order to the summer.
In March.
In totality as we continue to evaluate and sign on and onboard the first Republic talent. That's in the market places. There is a dislocation that we are competitively looking to put on new personnel to service the clients and bringing on their books.
Got it thanks guys.
Thanks, Laura.
Thank you and there are no further questions at this time I will now turn the call to the management team.
Thank you again for taking the time to join US This morning and for your interest in <unk>.
Ladies and gentlemen, this concludes your conference call for today. Thank you for participating and ask that you. Please disconnect your lines.
Ladies and gentlemen, this concludes.